Unrevised transcript of evidence taken before

The Select Committee on Economic Affairs

Inquiry on

THE ECONOMIC IMPACT ON UK ENERGY POLICY OF SHALE

GAS AND OIL

Evidence Session No. 3 Heard in Public Questions 33 - 46

TUESDAY 22 OCTOBER 2013

3.35 pm

Witnesses: Mr Craig Bennett, Dr Doug Parr and Mr Nick Molho

USE OF THE TRANSCRIPT

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on www.parliamentlive.tv.

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contact the Clerk of the Committee.

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Committee within 7 days of receipt.

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Members present

Lord MacGregor of Pulham Market (Chairman)

Lord Griffiths of Fforestfach

Lord Hollick

Lord Lawson of Blaby

Lord Lipsey

Lord May of Oxford

Lord McFall of Alcluith

Baroness Noakes

Lord Rowe-Beddoe

Lord Shipley

Lord Skidelsky

Lord Smith of Clifton

________________

Examination of Witnesses

Mr Craig Bennett, Director of Policy and Campaigns, Friends of the Earth, Dr Doug

Parr, Chief Scientist and Policy Director, Greenpeace UK, and Mr Nick Molho, Head of

Policy (Climate & Energy), WWF-UK

Q33 The Chairman: Good afternoon, and welcome to the Economic Affairs Committee.

This is the third public hearing of our inquiry into the economic impact on UK energy policy

of shale gas and oil. Mr Bennett, Dr Parr, Mr Molho, you are very welcome. Thank you both

for coming today and for the paper, which you have I think jointly produced. I am grateful if

you would speak loud and clear for the webcast and the shorthand writer. Our questions

will go mostly to you all, but where you agree with what the first respondent has said and

have nothing really to add, do not feel you have to speak each time. A nod will be enough

and I will record that for the transcript. Would any of you like to make a statement, or are

you happy with the evidence you have given us?

Mr Molho: I am happy to make an opening statement if that is at all helpful.

The Chairman: Yes, fairly shortly. Please do.

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Mr Molho: Our organisations are opposed to the development of shale gas in the UK,

mainly on grounds relating to climate change, and there are two important aspects, which I

would like to touch on briefly, if I may. First of all, at a global development, Dash for Gas

infrastructure is incompatible with preventing the worst aspects of climate change. Recently,

the International Energy Agency published research showing that in order to prevent global

average temperatures increasing by more than 2°C, which is the threshold that scientific

consensus describes as constituting dangerous climate change, two-thirds of currently

proven fossil fuel reserves would have to stay in the ground. In the case of gas, this requires

just under half of currently proven gas reserves to stay in the ground.

It is important here to understand what the IEA means with this definition. Currently proven

fossil fuel reserves are fossil fuel reserves that have been discovered and are technically

coverable and can be extracted with a 90% chance of making a profit. In other words, we are

talking about a very limited pool of fossil fuel reserves, compared with the ultimate pool of

reserves that you have globally.

Secondly, bringing this issue back to the UK, our strong concern is that we are seeing signs

that the exaggerated hopes linked to the exploitation of shale gas in the UK risks creating an

energy policy that is excessively biased towards an increased reliance on gas infrastructure.

This creates two sets of risks. First of all, it risks creating a breach of our carbon budgets,

given the evidence provided by the Committee on Climate Change, which shows that both

in the heating sector and in the power sector the UK needs to significantly reduce its

reliance on gas during the 2020s.

Secondly, and as highlighted in the excellent report that your colleagues in the European

Union Sub-Committee on Economic and Financial Affairs provided a few months ago, it also

risks undermining the long-term policies that we need to attract substantial investment in

low-carbon infrastructure. This is a concern not only because that infrastructure is key to

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meeting our carbon targets but because that investment is also key to keeping the lights on,

to accelerating the cost reduction of new technologies such as renewables, and to help

better insulate our energy bills against fossil fuel price variations.

The Chairman: I was going to ask you whether you could explain the position of your

organisations, because obviously you have outlined a lot of it in the paper you have

submitted, but I wondered whether others of you would like to pick out the key features.

Dr Parr: I think Nick has covered it adequately there. I am perfectly happy with that.

Mr Bennett: Yes, indeed.

Q34 Lord Lipsey: Let us leave aside the question of emissions and the global warming.

You state other difficulties with gas in your paper of physical and environment damage. If

those were the only factors and there was no question of emissions, would you still be

against taking any shale out of the ground, or is it really because of the emissions that you

want it left it?

Mr Molho: I think the emissions are clearly a very important factor, given that the reality in

the ground is that the majority of fossil fuels need to stay in the ground if we are going to

prevent the worst economic, environmental and other implications of unmitigated climate

change. From a local level, the key issues that we would want to be looked at more carefully

at a local level would include well integrity and the impact that this can have on groundwater

contamination.

Just to give you a bit of background on this issue, a recent report from the European

Commission suggested that up to 5% of fracking wells may be subject to well integrity

concerns, i.e. there is a concern that the way in which those wells are sealed will not

completely prevent contamination to the neighbouring environment surrounding the well,

which at times can include groundwater. Given, in a hypothetical case, that the UK may be

able to provide large amounts of economically recoverable shale gas, this would, according

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to Bloomberg, require the drilling of around 1,000 wells per year at the peak of activity. We

would want to ensure that the regulatory framework led by the Environment Agency was

adequate to cover this, and we are concerned that the Environment Agency, which has

suffered serious staff cutbacks in the last few years, with the final round of cuts announced

just last week, is adequately resourced to cope with a hypothetical shale gas revolution in

the UK.

Lord Lipsey: That was a learned response but did not answer the questions, which was: if

there was no threat of global warming in this gas, would you still be against it, or would you

say, as you perhaps did in your last answer, that if the regulatory framework is right, it could

be a goer?

Mr Molho: We would revise the position accordingly, yes.

Lord Lipsey: Thank you.

Mr Bennett: I would like to add, if I could, that it all depends on the context and on the

scale of the activity. One other area of local impact that I think should be a great cause of

concern is about the consumption, the quantities, of fresh water required for fracking. That

is worth emphasising, as fresh water needs to be used as opposed to saline. Studies vary, but

in the United States water use has varied from 9,000 to 29,000 cubic metres for one frack

on a well. That is a huge amount of fresh water in any context, but if you then link that to

some of the predictions that for fracking to have any economic impact we need to see

between 1,000 to 3,000 wells being drilled a year—just yesterday, Sir David King, the former

Chief Scientist, told the TUC conference that he estimates that around 2,000 to 3,000 wells

need to be drilled a year—that is an extraordinary amount of consumption of fresh water.

In a previous life, I worked at the University of Cambridge and ran the Prince of Wales’s

Corporate Leaders Group, and there I worked very closely with a whole range of water

companies. They are already very concerned about where they will seek quantities of fresh

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water for the nation’s needs in the 2020s, and certainly in a scenario where we might very

plausibly towards the end of the 2020s see a series of hot dry summers, or indeed even dry

winters, they are very concerned as to where they are going to find the fresh water

resources to meet the nation’s needs. If you then have a peak in shale gas activity at around

that same time, that is a very difficult scenario for them. I have spoken to a number of them

recently, and they emphasised that what really concerns them is that no one has actually

spoken to them about this at this stage. This whole area of shale gas exploration has not

received nearly enough attention.

Lord Skidelsky: What is the relationship between the resources of fresh water and the

shale itself? Is the implication of your remark that most of the fracking would be done in

areas of plentiful fresh water, as opposed to, say, in the south? What would the geographic

implication of what you are saying be for the UK?

Mr Bennett: Of course, the impact of this quantity, this demand of fresh water, will be

regional, so wherever we see a large degree of fracking, that is where you will see a large

consumption of water needed to enable that fracking to take place. Of course, we do not

know now for definite in which regions of the country we might see a good deal of fracking,

and we cannot be sure either which regions of the country will suffer water stress or could

suffer water stress during, say, the 2020s. But we do know that even to date, over the last

couple of decades, we have seen parts of the south-east, including Sussex, suffer very

significant water stress in some periods. We have even seen parts of the north-west suffer

water stress at times, and that is just in the last couple of decades, let alone in any scenarios

of future climate impacts that may exist in decades ahead.

I really think that the thing to emphasise here is that this is a whole area of concern where

the research has not been fully undertaken, the modelling has not yet taken place, and the

link between fracking shale gas at any kind of scale and any kind of economic impact has not

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been joined up with what that means for suppliers of fresh water, let alone cross-referencing

that with future climate scenarios that plenty of science bodies have done in this country.

We have not seen that work done yet, but what we have seen are some politicians pushing

ahead and talking about a shale gas bonanza before any of that modelling has taken place.

Q35 Lord McFall of Alcluith: Professor Muller, who is our next witness, says in his

submission to us, paragraph 14, that the dangers of waste water earthquakes from fracking

can be eliminated by the requirement that flow-back water be recycled, and the technology

for this has been developed in Shell Oil, so they hope to be able to recycle essentially all its

waste water in that manner. What comment do you have on that from the professor of

physics at Berkeley?

Mr Bennett: I have not read his submissions, I confess, but there have been plenty of studies

that still raise very significant questions about that. I was talking there about the

consumption of fresh water. I have spoken to people in the shale gas industry who tell me

that the technology and practices they use at present are still using fresh water. There is

speculation about alternative approaches that may or may not be appropriate in the future,

but my understanding is that it all depends on context, and I think it would be rash to make

a generalisation at this stage.

Lord McFall of Alcluith: If that technology was developed, would you be content?

Mr Bennett: I think we have to look at the whole context here, the whole package. What

we cannot do is take any one element of this and look at it in isolation. We have to look at

the whole package of impacts. As Nick has said right from the start, our primary concern is

the impact of a large shale gas scenario on climate change, and I do not think we are in a

position to see how we can just dismiss that as part of any plausible scenario.

Baroness Noakes: I just want to follow up on the water point. It seemed to me that this is

not a question of a principled objection to fracking; it is just a practical issue that needs to be

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resolved, and it is not necessarily going to involve the water companies because it will be for

those operating the fracking operations to obtain their water supplies, which could be

straightforward abstraction, or it could be using the technology that Lord McFall referred to.

It is perhaps not surprising that the water companies have not been fully involved in that, and

it seems to me that this is just a practical issue that companies would have to resolve in the

economics of whether or not they can proceed.

Mr Bennett: Except that in my time, in the work that I have done very closely with these

water companies, they have very detailed modelling going into many decades ahead, in

different climate scenarios, as to water availability. A large shale gas exploitation scenario has

not been factored into any of those scenarios, so that in all the work that has been done

between water companies and Ofwat right now to understand what kind of investments are

needed to secure future fresh water resources, none of them consider at all the impact of a

high shale gas scenario. The evidence would suggest that there is the potential for a high

shale gas scenario to completely change those models and make them redundant. This has

not been considered at all.

Baroness Noakes: Only a high case would completely change those models, you were

saying, so a lower or medium case would be absorbable within the models?

Mr Bennett: We do not know what a low or medium case would necessarily be categorised

as. I mean that a handful of wells will not have a huge impact, but if we are talking about a

scenario of shale gas that has any kind of economic impact—according to Sir David King,

that would be around 2,000 to 3,000 wells being drilled every year, across the decade—then

unquestionably that would have a significant impact on the availability of fresh water

resources.

To come back to your question on that, it also raises real questions as to who will be able to

decide who gets that water. If you imagine a scenario where we have had a series of hot dry

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summers, there is a hosepipe ban in place in parts of the country in the mid-2020s, and there

might even be standpipes in some streets in parts of the south-east, who is then going to

decide who gets the water: households or Cuadrilla? That is a whole area of debate that has

not been looked at at all yet. Indeed, I am not aware of anyone doing any modelling for that

at the moment in this country.

Q36 Lord Lawson of Blaby: I understand where you are coming from on the question of

global warming and all that, but of course what we do in this country is neither here nor

there. It is a global issue, and it depends on what is happening globally. Leave that to one

side. As Lord Lipsey was saying, if you were not concerned about that, would you still be

concerned? What you said astonishes me. First of all, the amount of water that is used in

fracking is derisory. Pretty well every industry uses water to some extent, and few industries

use as little water as fracking. Agriculture is the biggest user of water, but there are many

others that use more. What puzzles me even more is that you say that no studies have been

done, that we do not know yet, and all that kind of thing. The fact is that it has been

happening in the United States for many years, and in the United States it has been proved

beyond any doubt that there is no merit whatever in the case you are making. What is there

about the United Kingdom that makes it so totally different from the United States?

Mr Bennett: I am very happy to answer that. What I was referring to when I talked about

the studies is that no studies have been done that look specifically at the impact of a high

shale gas scenario on water resources in the United Kingdom, and very detailed modelling

needs to be done on that.

Lord Lawson of Blaby: But it is happening the United States, so we do not need studies.

We know.

Mr Bennett: What I would say—my colleagues will chip in here—is that many factors make

the United Kingdom very different from the United States on this whole question of shale

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gas, but on this particular point about water what is very relevant, of course, is population

densities. We have 60 million people living in these islands, and population densities in many

parts of the United States, including those that have seen a good deal of shale gas extraction,

are much lower. Therefore, demands for fresh water from populations in those regions are

far lower than here in the United Kingdom. That is one key difference. I will let my

colleagues fill in on any other points.

Dr Parr: I will go back to the original question about the local impacts and say that the

impacts have been evaluated by, for example, the Royal Academy of Engineering. They do

not regard these as insuperable, but let me draw out what Nick touched on earlier about

there being an important difference between whether it can be effectively managed and

whether it will be effectively managed. We have an Environment Agency, a Health and Safety

Executive, even DECC itself, which are subject to deficit reduction plans, and my question,

and it is a question, is whether they have the capacity to manage the sort of expansion that is

being proposed and to develop whole new areas of understanding and expertise while their

core budget is being cut and staff are being cut right, left and centre. I would go further than

that and say that for a new industry in these circumstances, particularly with issues like

methane and air pollution, where issues that arise will pass with almost no trace, a level of

monitoring by an independent external would be an appropriate way to think about how the

regulation should be approached.

I emphasise first of all that we are ignoring what for me and Greenpeace is the most

important starting point, which is about the level of fossil fuel and the impact on climate

change. Secondly, of course, as I said, is the question whether there is the capacity to deliver

on that effective regulatory approach, which has been outlined elsewhere.

Q37 Lord Smith of Clifton: Gentlemen, do you believe that the environmental risks you

see in the development of shale gas are covered by existing regulations on onshore gas and

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oil production, or do you see a need for a new regulatory framework specific to shale gas?

We have touched on water in previous questions. You also mentioned methane and

earthquakes.

Mr Molho: If I can briefly make a point on the water issue, I think a lot of these questions

really need to be answered by the Environment Agency, but I would highlight two

differences between conventional fracturing, which has been going on since the 1940s, and

hydraulic fracturing, which has been going on more recently in the United States. It is that

first of all, as opposed to conventional fracturing, which tends to be done in vertical wells

with low-volume processes and at low pressure, shale gas fracking requires a high volume of

processes, higher pressure, and fracking into lateral sections of the well. There are some

differences there, as well as the local impacts that come out of that need to be clearly

understood to ensure that the regulatory regime is indeed appropriate, especially when you

are looking at issues around well integrity.

Your second difference is that to sustain a high level of shale gas production, we will need at

the peak of activity to drill a significant number of wells to sustain that level of production.

According to Bloomberg New Energy Finance, in order for the UK shale gas reserves to

take over the price-setting role from imported gas this would require over 1,000 wells

drilled each year in the UK over the peak of activity. I guess it goes back to my point and the

issue that Doug Parr highlighted around whether it would be done safely. That requires the

Environment Agency to have the capacity and the adequate resources to do so, and the

recent staff cuts are of concern to us in that respect.

The Chairman: Does anyone else wish to respond to that one?

Dr Parr: Only to add that there are already a number of existing processes, such as

environmental impact assessment, and currently the AMEC is doing a strategic

environmental assessment. There is plenty of process there. In many cases it is not about

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identifying whole new tranches of stuff but about doing the right things with what we already

have, which goes back to my previous point about delivery on what is already there and

what is already known about, rather than inventing new stuff.

Lord Smith of Clifton: We heard earlier from an expert in the legal framework necessary

that the regulatory framework is really not up to scratch for these new developments. Do

you believe that may be the case, or you just do not know?

Dr Parr: I just have not taken a view on it. As I say, I am aware that a lot of things need to

be sorted out at implementation, but I am not closing the door on a different frame if that

would be seen as appropriate.

Mr Bennett: I would like to add that just a year ago I had a conversation with the former

deputy head of the Environmental Protection Agency in the United States, and she told me

then that her concern was that so much of the so-called shale gas revolution that has

occurred in the United States occurred far quicker than they were able to put the regulatory

regime in place in that country. I think the strong view of regulators in the United States is

that they do not currently have an adequate regulatory regime for shale gas. One of the

concerns there in particular is that the studies have just not been undertaken over a long

enough period, or indeed with the right baseline data, to give a proper understanding of the

impact that fracking operations have had on a whole range of issues. Indeed, there is still not

really the capacity to put those in place.

If that is our starting point, I would build on the point that Nick made as well that here in

the United Kingdom at the moment there are already very significant concerns about a lack

of capacity within regulators like the Environment Agency to even deliver on their current

expectations that are placed on them with respect to water quality and other measures,

even without an expansion of shale gas. It raises some very real questions as to how

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confident we can be that the regulatory capacity or indeed the framework could be put in

place to give the assurances that many people in this country would seek.

Lord Smith of Clifton: Would you say that an increase in capacity now, in anticipation of

what might come, is desirable, or are you saying that we are really not in a position to look

at that regulatory requirement until things develop, and that we are in a chicken and egg

situation a bit?

Mr Bennett: Indeed, but there is public concern about this issue. The public would very

much want to see a regulatory framework put in place before we see shale gas operations at

any kind of scale, to protect their local environment, protect water courses and so on. The

problem is that our regulators at the moment do not have the current capacity to do that—

that is what I am told—and there are questions as well as to where we would draw the

evidence for setting the appropriate regulatory framework, given that there are questions

about it even in the context of the United States?

Q38 Lord Hollick: You have identified a number of risks around shale gas and the

extraction of shale gas. Are they materially greater than the risks around coal mining or the

extraction of oil and gas in the UK?

Mr Molho: In terms of extraction and the well integrity that I mentioned earlier, there are

some differences both in the type of fracturing that we are talking about and in the volume

of wells that need to be drilled to sustain a high level of production. Those are issues or

differences that we would want the Environment Agency to look at carefully, but it is

absolutely fair to say that issues around, for instance, groundwater contamination, are

applicable to other activities across the mining and oil and gas extraction centre. The

difference is that we are talking about a different type of hydraulic fracturing process, and

the volume of wells that we are talking about is higher.

Lord Hollick: The evidence for that is?

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Mr Molho: The European Commission published a study recently looking at the history of

well integrity in the United States and the differences between the traditional hydraulic

fracturing process, which has been going on since the 1940s, and which, as I said earlier, is a

low-pressure fracturing process that requires lower volumes of processes and is very much

focused on vertical wells, and hydraulic fracturing—i.e. you are fracking into lateral sections

of the well and you are using much higher pressure water and higher volume processes—

which introduces a different kind of risk. The analysis coming out from this report was that,

on average, 5% of wells may have concerns around integrity and may not be properly sealed

from the surrounding environment around the well, which can include groundwater. That is

an issue that we would want the Environment Agency to consider carefully.

Lord Hollick: Is it your judgment that if the regulations were clear and the environmental

agencies had the resources, the risks, the additional risks, the different risks, could be

adequately managed?

Mr Molho: I think they could be adequately managed, but the key question is: will they? It is

key to have these kinds of local resources, but, yes, they could be adequately managed. I

would go back, I guess, to my opening point, which is that our biggest concern about the

exploitation of shale gas, both in the UK and more globally, is the link with climate change.

Q39 Lord Skidelsky: My question gives you an opportunity to amplify, if you wish to,

your original responses to Lord Lawson’s comment. Does the evidence from the United

States provide support for your view on the physical risks and environment risks? You

mentioned differences in density of population, but there is also the issue of methane gas. I

wonder whether you would be interested in doing that comparison.

Mr Molho: There are two things I could add to what I have said on the United States. On

the issue of methane leakage, what comes out quite clearly from the evidence in the United

States is that there is still a lack of understanding as to the exact amounts of methane that

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are being leaked at particular wells. We are seeing different figures being provided for a

range of different wells across the country. It has also appeared that in several cases industry

may have underestimated or underrepresented the amount of fugitive methane emissions

that have taken place.

Research from Princeton University suggests that in order to maintain its so-called climate

advantage over coal—i.e. the ability of shale gas to be below coal in overall carbon

intensity—cumulative methane emissions should not exceed 3.2%. What all this tells us, and

this was an issue that was highlighted very strongly in the scientific study that came out of

DECC just last month, is that we need significantly more peer-reviewed research on the

issue of methane leakage: first, to understand what the causes of methane leakage are, and

how, and what amounts we are talking about; and, secondly, to understand better what we

need to do from a regulatory perspective to cut those fugitive methane emissions and

prevent them happening in the first place.

The second issue that I would like to touch on briefly on the United States is that the United

States has often been described as a successful example of how greenhouse gas emissions

could be reduced cost-effectively. What I find very striking about that observation is that this

really underestimates the full picture—the full picture being that the increased shale gas

exploitation and use of shale gas in the United States have led to significant increases in coal

exports to other countries. According to the US Energy Information Administration,

between 2000 and 2010 the average share of coal that was produced in the US and exported

to foreign markets was in the region of 5%. In 2012, this rocketed to 12%. In other words,

while we have seen an increased use of shale gas in the United States, that has been

accompanied by an increased export of coal to European and Asian markets, where the coal

is then being used and burnt and is adding to global greenhouse gas emissions, which often

fails to be tackled by commentators in the shale gas debate. In other words, we really need

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to look at this issue and the impacts of shale gas in the round, and remember that in a lot of

cases the increased use of shale gas, in the absence of binding global greenhouse gas

agreements, will result in more fossil fuels being burnt, rather than simply shale gas

substituting for dirty fossil fuels.

Lord Skidelsky: You have pointed to a correlation. To what do you attribute the increased

exports of coal?

Mr Molho: One of the big failures, especially in the European market, has been the

incredibly low carbon price. Were it not for such a low carbon price, we would not have

seen the increase in coal burning that we have seen in some European countries. Clearly the

increase in gas prices has played a role as well.

Dr Parr: Yes, the decrease in coal prices in Europe has been strongly associated with the

increased export from the US, and that is indeed why in the UK and Germany we are seeing

a high level of coal burn. Our coal burn in the UK has increased more proportionally than

that in Germany, in fact. There is no question that there is a spread of fossil fuel through

some level of international market.

I guess I should just try to cover off your question about the physical effects in the US. Pm

other issues such as groundwater contamination, there is no definitive study from an

authoritative agency that says that there is a problem here. What we have is anecdotal, albeit

rather a lot of it, about the issues that arise from groundwater contamination, and some

correlations have been established between contaminants of groundwater and fracking

activity—correlations but not causations, to link to your earlier point.

However, we also need to be mindful of the unknown level of what could be called gagging

orders: in other words, where people who strongly feel that they have been affected have

persuaded companies that they should enter into some kind of civil arrangement, whereby

they are paid and then told to be quiet. That might serve the interested parties very well in

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the US. It does not particularly serve the evidence base for another country that is looking

at the US experience.

Q40 Lord Lawson of Blaby: I would make one quick observation and ask you a question.

The observation is that one of you said that the difference in the United Kingdom—and I

asked this question—is that we have a greater population density. I would remind you that a

lot of the fracking has gone on in the United States in Beverly Hills and the Los Angeles

region more generally, which has a very high population density, so I do not think there is

any merit in that argument.

Leaving that aside, on the question of the reduction in the coal price, you are quite right:

there has been a reduction in the coal price, and although the main reason why Germany has

moved so much to coal is that they decided in the wake of Fukushima, as you are well

aware, to abandon the nuclear route, coal has taken up the space. In general, it is quite right

that shale gas has become very cheap in the United States and could be elsewhere, no doubt,

and coal has certainly gone down in price. Let me ask you this. Are you against cheap

energy? Do you think it is a bad thing?

Mr Molho: I look at the issue of energy policy and climate policy by taking into account the

economic aspects in our countries and those of others, including the developing world. I

note in particular that the World Bank, in its two Turn Down the Heat reports this year on

climate change, made it very clear that unmitigated climate change would impact hardest on

the world’s poorest countries, which are the very countries that have the least economic

and technical ability to adapt to it. In order to address the all round issue of cost of living

both in the UK and internationally, we need to move cost-effectively towards a low-carbon

power sector.

Bringing the issue back to the UK, the Committee’s analysis on climate change was very

clear that a move away from the fossil fuel system towards one that is based on energy

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efficiency and low-carbon energy was in the best interests of UK consumers in the long run.

What the report found in particular was that by moving early and having a low-carbon

power sector by 2030, UK consumers could save between £25 billion and £45 billion,

compared to remaining in the fossil fuel-heavy system, especially if the world takes strong

action to tackle climate change, because that will come with a gradually rising carbon price.

Lord Lawson of Blaby: The figures that you quoted have been contested. That aside, can

you answer my question? Are you opposed to the idea of cheaper energy? I think most

people in this country would love to have cheaper energy.

Mr Molho: Absolutely.

Lord Lawson of Blaby: It is even more important for the poor people in the poorest

countries of the world not to have to pay high prices for their energy.

Mr Molho: The overwhelming evidence from the major bodies such as the International

Energy Agency and the World Bank is that the most long-term, cost-effective way of moving

towards a world that prevents the worst impacts of climate change and delivers cheap

energy is to embrace a clear long-term strategy that is based on energy efficiency and low

carbon policies that can deliver long-term reductions in the cost of energy. In other words, I

am fully for cheap energy, but I strongly believe that in the long term if we want to live in a

world that avoids the worst impacts of climate change on the world economy—we are

talking about substantial impacts—we have to embrace the low-carbon route.

Dr Parr: If I can just add to that, in some ways, “Are you in favour of cheap stuff or

expensive stuff?”, is a no-brainer. We routinely expect people to be paying more to look

after the future than simply to take all the goodies at the present. If we did not, we would

simply be abandoning pensions policy, whereas there is a whole suite of regulatory

approaches and tax incentives towards helping people look after the long term. I see it in

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some ways as the same as that. We are potentially paying upfront in order to look after the

long term.

Q41 Lord May of Oxford: By pure coincidence, I have the one question I really wanted

to ask. It is rather strange. I declared my interest as a member of the climate change

committee. I expected much more of what you were going to say to refer to our trajectory

to 2030 and 2050, and as you all know we have a very ambitious trajectory to reduce by

80% the amount of carbon we put into the atmosphere by 2050. One way of doing it is, for

example, to get tougher on immigration, but when I raise that on the climate change

committee it is regarded as being in bad taste, so I will let that lie. My point is that you can

see a feasible road to 2050 if everyone comes on board and we do it in a way that is not all

that costly, but it does require decarbonising the energy supply almost entirely by 2030. En

route to that, I differ from you. I have an upbeat view of fracking and shale gas, because, en

route to 2030, we are still going to be using some conventional things, and I would rather

have us using shale gas than coal because, apart from anything else, that comes together with

the injunction of carbon capture and storage, which is at the moment beyond the bounds we

have. In that route to 2030, I am all for embracing on an appropriately modest and targeted

scale cleaner and cheaper forms of carbon-releasing energy, which shale gas may give, but I

am surprised that you did not say that much of this discourse that we have just had is on the

premise that here is something that has, again, the real advantage that we are not going to be

so dependent on other people, and that we can go to a much more independent, politically

simple way of continuing on the road we are on. We are only on target for 2030 by virtue of

the recession. With the current Chancellor, we may well stay on the road to 2050 if he

completely prolongs the Session, but I do not think that is what he will do. I am just curious

why you did not make a bigger point of that instead of banging on in such detail about other

things.

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Mr Molho: When we refer to the fossil fuel component of our energy system, clearly we

would much rather that to be a gas-based fleet of plants than a coal-based fleet of plants, and

that is why all three of our organisations are pushing together towards a toughening up of

the emissions performance standard in the Energy Bill to ensure that emissions from coal

plants can be better regulated and avoid undermining our long-term carbon budget.

There are two important points to make. The first is that we need to have a reality check

about when UK shale gas will be available. The overwhelming evidence shows that, given the

stage of development of the UK shale gas industry, we are very unlikely to see, even in the

event of large amounts of economically recoverable reserves, the large amounts coming on

stream until the early to mid-2020s, and even the report that was prepared by—

Q42 Lord May of Oxford: That has not addressed the question I just asked you. My ideal

preference would probably be yours: that decarbonising energy generation by 2030 means

that you are not putting more carbon into the atmosphere, so what happens beyond 2030?

On the trajectory that is our target at the moment, and the one that is accepted by the

Government, what you have just said is irrelevant, or am I missing something?

Mr Bennett: Let me make some comments on that, if I can. In so doing, I would like to

answer a couple of the last questions all in one go, if I can. You are absolutely right, of

course, Lord May, that the targets that the Committee on Climate Change have proposed

and put in place and the targets under our Climate Change Act paint a feasible road as to

how we are going to get to where we need to by 2050, if everyone comes on board. We

have said, as the other organisations have, that of course there is a role for gas through to

2030 in that regard, but we have to be really clear that we can manage that role. That is why

we strongly support the decarbonisation target for the power section that your Committee

has proposed, and we very much hope that that can be implemented.

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The reality check, though, if we move from the theory to the reality here, is of course that

there has been political opposition to that decarbonisation target from the Chancellor—one

of the staunches advocates of shale gas—which causes real questions about how you can

manage the role of shale gas to make sure it is compatible with delivery of those targets that

you are talking about.

Nick also makes a very good point that I think relates to a previous question about this

supposed ability to be able to cut and paste the US experience to the UK experience. The

US already had an established onshore drilling industry. That has two implications, one for

the speed and one for the cost of how quickly they can deploy and scale up shale gas

operations in the United States. Here, because we have not had a large-scale onshore drilling

industry, it is going to take longer and it is going to be much costlier to exploit shale gas at

scale, all of which means that people within the industries themselves all point to it being the

mid-2020s before we see any shale gas operating at scale.

The scenario we see in front of ourselves at the moment is that it will be the mid to late

2020s before we see shale gas at scale. The Government are currently opposed to a

decarbonisation target to manage that and to make sure that the power sector is generating

electricity at 50 grams per kilowatt hour by 2030.

The additional point to that, when you look at the alternative, is that we see a global

renewables industry that is cutting its costs year on year. We see predictions from

Bloomberg New Energy Finance and from Sir David King. Indeed, the very requests that the

solar industry, for example, is putting in are for a lower strike price: a much cheaper cost.

Just seven years from now, there is a good possibility that solar will be cheaper than fossil

fuels. In all that context, we see the current focus on shale gas as something that can deliver

the answer to so many of our energy problems but that is out of time and not delivering on

the climate challenge that we really face.

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Mr Molho: May I just say that I think you might also be underestimating the impact that the

exaggerated hopes of future shale gas exploitation in the UK is having in the formation of

future energy policy? We are seeing the hopes linked to shale gas already setting the basis

for the potential for an excessive focus on future gas infrastructure that is not compatible

with our long-term budget.

Let me give you an example. The gas generation strategy and the EMR delivery plan contain a

set of three scenarios, including one scenario that envisages the power sector in the UK by

2030 having a carbon intensity of 200 grams of carbon per kilowatt hour. I have been talking

to a wide range of investors in the low-carbon space who tell me how concerning they have

found those scenarios to be and how they are reconsidering some of their long-term

investments in the UK low-carbon market, and I do not blame them, because if you

understand the implications of that scenario, the picture is rather concerning. If the UK

meets its renewables target by 2020, for which it is on track for doing, the carbon intensity

of the UK power sector will be in the range of 200 to 250 grams of carbon per kilowatt

hour. Even setting a scenario that plausibly says that one possible outcome in the UK is that

we may have a power sector with a carbon intensity of 200 grams by 2030 says in effect that

there will be no demand for low-carbon capacity throughout the 2020s. This sends a very

damaging signal to the supply chain. It is also an incredibly cost-ineffective way of building a

long-term low-carbon industry in the UK, which will have repercussions on consumer bills

and result in the UK missing out on several job creation opportunities in areas where it is

currently an industrial leader, such as offshore wind, CCS, wave and tidal power.

Dr Parr: As we are, I think, running a little short of time, I just wanted to state rather more

baldly the dilemma that I think we are in. As in our opening comments, it was pointed out

that the IEA scenario for meeting the 2°C climate change challenge means that about half of

existing known reserves are going to have to be left in the ground. That means that it is

22

probably going to be the most expensive stuff, which will probably include UK shale, because

again the IEA has identified the sort of gas that is going to have to be left in the ground, and

that certainly covers ours.

It also means that some country somewhere is going to have to decide to leave its fossil

fuels in the ground, and if it is not us, I do not know who it is going to be, because as soon

as those become developed and property rights are established, they become a lobby for

their exploitation, as we are seeing in the Arctic right now and as we are very shortly going

to see in the Brazilian pre-salts, which are huge reserves of potentially new oil, creating new

lobbies for burning it. If we are serious about this 2°C target, it does mean some pretty

crunchy and uncomfortable questions.

Lord May of Oxford: I think we should go on to the next question. I find this

disappointing.

Dr Parr: Maybe I have not understood your question.

Lord May of Oxford: We can discuss it later.

Dr Parr: Fine. Let us do that.

Q43 Lord McFall of Alcluith: If material volumes of shale gas are developed in the UK,

which existing sources of supply do you believe would be displaced: conventional gas, coal,

nuclear or renewables? I know that WWF has supported nuclear developments, but

Greenpeace and Friends of the Earth support wind, so you may have a different view on

that.

Mr Molho: I think we all see renewable energy as capable of being a key driver in overall

decarbonisation efforts, but in answer to your question, I think the most likely impact will be

that energy efficiency and low-carbon generation will be displaced. Let me talk you through

my reasoning. Under the terms of the industrial emissions directive, the majority of UK coal

plants will have to close around 2020 or thereabouts. Likewise, evidence regarding the speed

23

at which UK shale gas reserves could be exploited suggests that even in the event of large

amounts of economically recoverable reserves, those will not come on stream until the early

to mid-2020s.

That is precisely the time at which the Committee on Climate Change is recommending that

significant cuts in emissions and reliance on gas in both the heating sector and the power

sector need to occur. To the extent that those reserves are brought out of the ground and

encouraged to be used in our gas power stations and gas infrastructure, the most likely

scenario is that this will displace low-carbon generation.

Lord McFall of Alcluith: But it is hypothetical, is it not? There has not really been a

serious appraisal of the costs of shale gas and its production in the UK.

Dr Parr: It is quite difficult, but I think Bloomberg and Ernst & Young have both looked at

what they think the expected costs are going to be, and they—

Lord McFall of Alcluith: We are far away from a sound analysis if we can only cite

Bloomberg and Ernst & Young for a start. I do not mean anything against them, but they are

just two organisations. We really are far away from a real, serious appraisal. That is really

what we are looking at here.

Dr Parr: We do not actually know, because there is no on the ground evidence of how

much UK shale gas is going to cost. They would have to do it to find out.

Lord McFall of Alcluith: Unlike Lord May’s, you have answered my question.

Q44 Lord Griffiths of Fforestfach: If I can pursue that question a little more, from the

US it seems to me that we know three things, given the scale of what has happened there.

The first is that gas prices have fallen significantly. Secondly, coal prices have fallen

significantly, and because of US exports into the world market, international coal prices have

fallen significantly. I think you are saying that you think that in the UK this whole issue of

shale gas is going to result in relatively little volume and high cost. If I can play devil’s

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advocate to you, it seems to me that you are as much in the dark as anybody else as to what

could happen on that, and as an economist I would say one of the key issues here is how

much resources firms are ultimately going to put into exploiting all these resources. The

difference between a static analysis and a dynamic analysis is fundamental, and basically you

are trying to convince us of a case that, as far as I can see, you really do not have a strong

empirical basis for, which is exactly what I think Lord McFall was really saying.

Dr Parr: If you are saying that the only thing we can judge our evidence base by is actual,

empirical, on the ground evidence for what it is going to cost in the UK, that is kind of self-

evident, is it not? The only thing we have is the best analysis by people whose analysis is

usually taken as being reasonably robust. I do not know what more to say to that.

What we can do is say, well, what does the IEA say is going to happen? If we are going to

chuck out all the analysis by bodies like that, then I think we are in a totally evidence-free

zone.

Lord Lawson of Blaby: There is evidence on the ground. That is the point.

Dr Parr: Yes, but how applicable is the evidence in the US to the UK? That is absolutely part

of what is going on here, and that is why people who do know about energy, like Bloomberg,

like Ernst & Young, are coming up with different numbers from what is available in the US.

As I say, if you do not trust those, I am not sure who you do trust, because you are

essentially saying the only way we will ever know what the cost of this is going to be is to

actually do it, which has a whole set of other problems that I think we have covered.

Mr Molho: May I just add this? A lot of the time the debate on UK shale gas can be very

UK-centric, and forgets the fact that we are part of a well interconnected European gas

market. Putting aside the fact that you may have views on the International Energy Agency’s

view and analysis on future prices, the analysis from the IEA shows that, even assuming a

strong deployment of shale gas resources across Europe, the price of shale gas is going up.

25

The price of gas in Europe will go up between now and 2035, and will remain sustained at

high levels. I refer you to page 39 of the latest report from the Committee on Climate

Change on electricity market reform, which has a very useful range of diagrams that show

how the evolution of gas prices in Europe is likely to fare, even in the event of strong shale

gas exploitation in Europe.

All that is to say that we have to remember that what really matters in all this is the ultimate

European gas price, because that will influence the overall price of gas in the UK. When we

see the evidence that we have available to us, it strikes us as a very dangerous mistake to

associate exaggerated hopes on the future of UK shale gas exploitation with a policy that will

encourage the construction of excessive amounts of new gas infrastructure, because the

most likely outcome will be a continued high dependency on imports and continued reliance

on high gas prices.

Dr Parr: If I could just build on my previous point, I have mentioned the analysis that has

been done about UK and, as Nick has mentioned, EU gas prices, but these have been done

by people whose views are generally taken as being authoritative. If one is going to abandon

that, you have to have reasons for abandoning that. It is perfectly true to say that there is no

empirical evidence, but on what basis does one choose to ignore the analysis and advice that

is produced by bodies that are generally thought of as being authoritative?

Lord Lawson of Blaby: One reason is that nobody knew in advance of the modern

fracking revolution in the United States how that would work out. Nobody knew in advance

that it was going to produce so much cheap gas and that the price was going to fall so much.

Until you try it, you do not know. It may be that the United Kingdom is different. It may be

that it is not. Until you have done it, you do not know. They did not know in the United

States.

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A further point is that one of the curiosities about gas—and I have a little knowledge about

the energy sector because many years ago I was Secretary of State for Energy in this

country—is that the cost of transporting by sea is extremely expensive, because you have to

liquefy it first. Then you transport it in liquid form, and then you have to gasify it again at the

end. The transport costs of gas are huge, and your evidence does not take that into account

at all. That is not the case with coal. It is very easy to transport and therefore you have what

has been seen. If we have a supply of indigenous gas, which avoids these transport costs, that

is of considerable benefit, is it not?

Mr Molho: With all due respect, I accept your point about the transport costs of LNG, but

you are looking at only part of the picture. Fundamentally, what impacts the UK gas price is

the overall dynamics and the overall relationship between supply for gas and demand for gas

in the European gas market. Comparing the price of UK shale gas versus the price of LNG

only looks at part of the picture.

Q45 Baroness Noakes: If it could be established that our locally produced shale gas was

cheaper because it did not have transport costs attached to it, would it not make entire

sense for us to develop and use that? The answer to the question about who leaves their

carbon resources in the ground is someone else.

Dr Parr: They will probably all say the same thing.

Baroness Noakes: Fine.

Dr Parr: Then we will all use them. I remember the IEA’s report on the golden age of gas. It

said, “It will be a golden age of gas. It will not be a golden age for humanity”, for the reasons

of climate change, which we alluded to earlier.

Baroness Noakes: So the UK is the sacrificial lamb?

Dr Parr: That is why I posed the question: if not us, who? Who else is going to do that? Or

are we all going to go to hell in a handcart?

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Mr Bennett: I would like to add that I do not think it would be just the UK, because already,

of course, a number of countries in Europe have already banned exploitation of shale gas.

There has been a lot of conversation here about cheap energy, and understandably so,

because it is such a public concern at the moment, but we should not forget that there is

nothing cheap about climate change. If you look at the analysis by Lord Stern on the

economic impacts of climate change and climate change as one of the greatest threats to our

global economy over the decades ahead, for us to just dismiss the science on climate change,

to dismiss the work by Lord Stern and his team and many other economic models as well, to

dismiss the very strong views that are being articulated at the moment by so many business

leaders that they need to be able to operate in a clear framework that indicates how we can

decarbonise our power sector, and even to dismiss the transformation that is occurring to

global energy because of renewables and the falling costs of renewables year on year—to

dismiss all that and to look at shale gas in isolation is not giving proper consideration to this

issue.

The Chairman: I do not think anyone is looking at shale gas in isolation, I have to say. I do

not think that is the context of our questions.

Lord Hollick: Is there not a danger, though, that if we leave shale gas undisturbed in this

country, we will become a dumping ground for cheap coal? I am not quite sure how that

solves climate change.

Mr Molho: This assumes that we are faced with a false choice between either burning lots

of shale gas or burning lots of coal, when fundamentally we have another possibility ahead of

us—one that is recommended by the Committee on Climate Change and the International

Energy Agency and others—which is to make a rapid move towards an efficient and low-

carbon energy system. That, in the long term, will result in significant savings for consumers.

The research I referred to earlier on by the Committee on Climate Change, which reviewed

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the case for decarbonisation as part of the Energy Bill, showed that a long-term

decarbonisation strategy could save UK consumers between £25 billion and £45 billion over

the lifetime of that infrastructure. We are not facing a binary choice. There are other

options on the table, and options that make long-term economic sense.

Q46 Lord Shipley: Can I just be clearer on what forms of energy you are in favour of?

You have left me with that reply with a vision of very, very large numbers of onshore and

offshore wind farms, perhaps tidal energy. I am not clear what form of energy you think this

country should be investing in, unless you actually think that it can all be done through

energy conservation investment.

Mr Molho: I think there are three essential pillars that need to be pursued, or that we

would certainly prefer to be seen to be pursued in the UK, and those are energy efficiency,

strong deployment of a wide range of renewable energy technologies, and increased

interconnection with the European power system, all of which have been proven to be

delivered securely and can make economic sense in the long run.

I would like to touch on the piece of work that we did precisely on that, whereby we

commissioned Cambridge Econometrics and asked them to compare the macroeconomic

impacts of a high gas power system in the UK versus the macroeconomic impacts of the UK

investing steadily in offshore wind. The study found that by having a stable regime supporting

the deployment of offshore wind in the UK, the UK GDP would be higher to the tune of

around £20 billion a year by 2030. It would result in the net creation of around 70,000 jobs,

and it would reduce annual UK gas imports by around £8 billion a year by 2030. Critically,

this could be delivered, with minimal impact on electricity prices, to the range of around 1%

in 2030. I would be very happy to provide the Committee with this Cambridge

Econometrics study.

29

Lord Shipley: I think I have seen the detail of that. Is that £20 billion figure that you are

quoting a net or a gross figure? There are increased costs.

Mr Molho: It is net. It is the difference between the two scenarios. It is the increase in

GDP in the offshore wind scenario.

The Chairman: I think we must stop it there. Perhaps you could let us know.

Mr Molho: Sure.

The Chairman: Can I thank you very much indeed for coming? We have another session

immediately ahead, so thank you very much.